Article: An Outsider's Look at Your Cash Flow


	Lynn Westergard

December 2003

An Outsider's Look at Your Cash Flow

A statement of cash flow helps you sort through the accounting noise and look at how much actual cash a company is generating

Financial statements for most businesses are based on accrual accounting, which, in an effort to best reflect the financial health of a company, takes into account non-cash items.
Sometimes, however, it can be valuable to sort through the accounting noise and look at how much actual cash a company is generating. The statement of cash flow provides you – and your lenders and investors – with this information.

Cash flow is the flow of money in and out of a company. Outflow is the money paid every month to employees, suppliers and creditors, and inflow is the money received from customers, lenders and investors. Cash flow can also be calculated as net income plus depreciation and other non-cash items.

Cash flow statement. Unlike your balance sheet and income statement, you can do little to manipulate your company’s cash situation. Your cash flow statement tells the whole story: either your company has the cash or it doesn’t.

Your balance sheet shows a one-time snapshot of your company’s assets and liabilities.
Your income statement indicates your business’s profitability during a certain period.
The cash flow statement differs from these other financial statements because it acts as a kind of corporate checkbook that reconciles the other two statements.

Simply put, the cash flow statement records the company’s actual cash transactions during the period. It exposes the reality that all those revenues booked on the income statement may not have been actually collected. At the same time, however, all the expenses the company accrued don’t have to be paid right away.

When someone looks at your cash flow statement, the first thing they usually look at is the bottom line item that says something to the effect of “net increase/decrease in cash and cash equivalents.” This line reports the value of the company’s cash and its equivalents, i.e., assets that can be immediately converted into cash. If you check under “Current Assets” on the balance sheet, you will find cash and cash equivalents (C&CE). If you take the difference between the current C&CE and last year’s or last quarter’s C&CE, you’ll get the same number found at the bottom of the statement of cash flows.

The following is a list of the various areas of the cash flow statement and what they mean:

Cash Flows From Operating Activities measures the cash used or provided by your company’s normal operations. It shows your company’s ability to generate consistently positive cash flow from operations.
Cash Flows From Investing Activities lists all the cash used or provided by the purchase and sale of income-producing assets.
Cash Flows From Financing Activities measures the flow of cash between your company and its owners and creditors. Negative numbers can mean the company is servicing debt, but they can also mean the company is making dividend payments and stock repurchases, which investors might be glad to see.

Conclusion

Like so much in the world of finance, interpreting the cash flow statement is not a straightforward, black and white issue. But it is an important piece to the puzzle in helping you and your investors and lenders analyze the true health of your company.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.